A report sponsored by annuity provider, Aviva, says as many as 1.4 million older people in the UK face hardship in retirement after so-called ‘Pension Freedom Day’, the date from when retirees have more flexibility on how to use their savings.
The report says 1.1 million people could face insufficient incomes if they choose to buy an annuity income with their pension pots, while this number could rise to 1.4 million if all those with defined contribution (DC) pensions decided to spend their savings on big-ticket items.
On April 6 this year, among other options, UK savers will be allowed to take up to 25% of their pension fund as a tax-free lump sum rather than have to buy an annuity.
The report, published by the International Longevity Centre-UK (ILC-UK) and sponsored by insurance company Aviva, says some 850,000 people coming up to retirement are particularly at risk of income shortfalls, due to a high concentration of wealth in DC savings combined with limited financial capability.
Putting everything in a savings account – another option available – could also jeopardise a steady income, leading pensioners to have to cut back on spending when they may need it most.
The report, Here today, gone tomorrow, uses data from the largest survey of the over 50s in England, The English Longitudinal Study of Ageing, to explore what certain choices made today could mean for overall levels of retirement income over the next 30 years.
One conclusion is that annuities must play a “key role in any future default strategy”, given the benefits for those who will be highly reliant on their DC pots for retirement income.
Ben Franklin, ILC-UK senior research fellow, says: “Annuities are generally misunderstood and the group who stand to lose the most from spending everything too early also score relatively poorly on financial capability, making them particularly susceptible to poor decision making.
“Without the appropriate support including a new default strategy, these individuals could end up significantly worse-off in retirement.”
John Lawson, head of policy at Aviva, adds: “We know people frequently underestimate their life expectancy and this research underlines how crucial it is to consider all your potential financial needs across the whole of your retirement, not just in the short term.”
The release of the report coincides with a survey from Franklin Templeton, Retirement Income Strategies and Expectations (Rise), which finds that planning for retirement is causing high levels of stress and anxiety amongst UK savers.
According to the research, 70% of people surveyed felt they have not saved enough for retirement.
Focusing on those under 55 years, 84% feel they are not saving enough. Most are looking for solutions to this, such as retiring later or taking on part time work.
The Rise survey, which was carried out amongst 2,004 participants in January this year, also found a link between types of pension plans and stress levels. People in employer defined benefit schemes feel significantly less anxious about retirement planning.
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